Takeout rates: Symposium hears of need for detailed study

TUCSON, Ariz. – Racetracks will not know where to set their takeout rates until the industry conducts a scientifically valid study of the issue using economic field trials and updated data on betting behavior, participants on a panel focusing on takeout said on Wednesday morning at the University of Arizona Symposium on Racing and Gaming.

Both panelists – a business analyst for the Association of Racing Commissioners International and an economics professor at the University of Southern California – contended that studies that have examined the issue of takeout rates suffer from limitations in their design and a lack of data that would allow the studies to incorporate the true impact of changes in takeout rates.

The solution, both said, would be to conduct large, rigorous field studies that would allow economists to determine the rates that would maximize the amount of revenue that racetracks could derive from wagering without alienating newcomers to the game.

The issue of takeout rates has become particularly germane over the past 10 years in because of several developments, notably the widespread use of rebates to reward high-rolling players and the protracted decline in betting over the past three years. Horseplayers, of course, have supported cuts to takeout rates, with some player organizations contending that the cuts would generate higher handle and revenue to tracks. But racetracks have largely been reluctant to adopt large-scale cuts because of concerns that revenue would decline.

The issue gained attention recently when California racetracks, owners, and trainers supported legislation that allowed an increase in takeout for exotic wagers to support purse increases. The Horseplayers Association of North America responded with a call for a wagering boycott of California races. Handle on California races has declined since the takeout increase went into effect.

Handle on races nationwide, however, has declined in the past year, and other factors such as declines in field size, general uncertainty in the California racing circuit, and competition from other signals have all played a part in the drops. The range of factors illustrate the problems racetracks face when trying to isolate the effect of takeout changes alone on wagering behavior.

Steve May, the business manager for the Racing Commissioners International, said that a project he undertook to examine takeout rates while studying for his master’s degree at the University of Arizona’s Race Track Industry Program failed to generate any firm conclusions on how takeout rates affect betting because he was unable to acquire enough data on handle at racetracks and handle by bettors. As a result, he said, proponents of takeout cuts do not have valid data to back up claims that the racing industry would be better off adopting lower takeout rates, despite the obvious contention that takeout rates would benefit individual bettors and despite several studies, some reaching back decades, that support cuts.

"The conclusion is blank," May said. "I don’t have enough data. It would be unethical to say there is a conclusion. There’s a lot of work that need to be done on this, and to cite studies from 1976 is not good business."

Dr. Caroline Betts, the USC economics professor, said that a review she undertook of all the studies pertaining to takeout rates and betting behavior in parimutuel markets failed to turn up a study that adequately captured the effect of changing takeout rates, largely because the studies did not incorporate real betting data. She said previous studies analyzing takeout rates were largely irrelevant because they were conducted before the advent of simulcasting, rebating, and account wagering.

"It’s not that the studies are invalid, it’s that the environment has changed so much that you need a much larger set of controls," Betts said.

According to Betts, the racing industry as a whole would benefit significantly by funding a proper study of takeout rates, which would allow racing to construct a Laffer curve that determines the optimal price of betting. Laffer curves – named after the economist Arthur Laffer, who famously used a drawing on a cocktail napkin in the 1980’s to demonstrate to President Ronald Reagan’s political advisers that cuts in tax rates could lead to higher tax revenue – illustrate how demand for a product changes in relation to changes in price, with the highest point on the curve determining the optimal price.

"It would be a big, big, project, but if you want to find out . . . what maximizes your revenue, that would be the most efficient way to do it," Betts said.

Betts also said that the review of the studies revealed an interesting experimental result in which giving players the ability to resell parimutuel bets they had already made led to increases in the amount of money that players bet. That ability is somewhat analogous to the opportunities available to customers of betting exchanges, which have become a hot topic of conversation because of the efforts by Betfair, the owner of TVG, to press for the adoption of betting exchanges in several states.

Both May and Betts said that the data that would allow a better way for racing to analyze takeout rates probably exists in the large account-wagering companies that operate in the United States. But they said that obtaining that data may be difficult. Scott Daruty, the president of Monarch Content Management, which buys and sells simulcast signals for the properties controlled by the Stronach Group, including the account-wagering company XpressBet, said after the panel that he was not aware that economists were seeking that data but that he might be open to pressing for making the data available on an anonymous basis.